The Securities and Exchange Board of India is investigating a possible nexus between some lead managers and promoters of companies raising money through public offers.

The regulator feels that certain lead managers strike deals with promoter groups to raise money in excess of what is actually sought by companies with an understanding that additional amounts raised will be diverted to lead managers.

This translates into higher public offer prices and affects the integrity of the initial public offer process, according to a Sebi official.

Promoters usually approach lead managers with their capital raising plans. A merchant banker then determines the best price an issue can fetch considering the market condition.

Even as IPO proceeds went to companies, the excess money got routed back to lead managers through various fabricated expenses, the official said. This does not get reflected in merchant bankers' fees, which are part of issue expenses.

Lead managers have been under attack by the capital market regulator for various inadequacies relating to IPOs.

Late last year, the regulator put an end to the discretionary allotment system for qualified institutional buyers, as investigations revealed that investment bankers were making disproportionate allotments to preferred clients, making it an uneven ground for several other deserving candidates. Sebi also slapped an upfront margin on QIBs for bidding in IPOs.

Further, Sebi has pulled up lead managers for the multiple application fraud. The regulator feels that the onus of ensuring that multiple applications do not get allotments is on lead managers.